We live in an uncertain world. To say this has prompted supply chain uncertainty in the last few years is an understatement. From geopolitical tensions and economic uncertainties to container shortages, cyber threats, and frequent extreme weather events, disruption is commonplace.
Although many of the factors that create bottlenecks and shortages are outside of your control, finding ways to evaluate and reduce supply chain risks is critical, particularly in times of crisis.
One way to do this is to prioritize sustainability. It’s a smart step because the environmental, ethical, and social performance of your suppliers plays a big role in their risk resilience – and ultimately, in yours.
your suppliers’ ESG risk is your ESG risk
At its core, ESG management is about risk control. By proactively identifying environmental, social, and governance hotspots in your own operations, you can take control of the potential risks they could present – be that financial, reputational, or physical. The same is true of your supply chain.
The partners that you choose to work with need to uphold the same values and adhere to the same legislative standards that you do.
For some industries such as conflict minerals or hazardous chemicals, managing complex supply chain risks is a familiar task. Today, however, more industries than ever before are feeling this pressure.
Whether it’s ensuring suppliers comply with new climate disclosure mandates or selecting suppliers whose labor practices match your corporate responsibility and human rights commitments, understanding your suppliers’ ESG performance is essential. Failure to do so can have serious reputational and financial costs.
building your ESG strategy
Before you can assess ESG risk in your supply chain, you’ll need to decide which factors are most important to your business.
Establishing a clear sustainability strategy is a good place to start as this will determine the importance of ESG in your supply chain, including which issues are most pertinent for your business depending on your industry, location, and the various legislative frameworks that you must adhere to.
Once you have formulated key ESG goals for your business, this will provide a guideline for supply chain sustainability. Gauging the ESG performance of your supply chain partners will then be relative to these targets.
Bear in mind that as supply chains increase in complexity and tougher sustainability legislation rolls out, understanding the caliber of companies you invite into your supply chain is a must.
feedback fuels ESG supply chain performance
As with all things ESG, supplier transparency starts with strategy, but it is fueled by data. As you set goals on issues such as emissions, water footprints, or diversity, equity and inclusion (DEI), you should identify how your supply chain partners will impact these goals, as well as overall performance.
Supply chain leaders can then work with your sustainability team to set thresholds on the metrics that will most impact those goals.
To best manage supply chain and ESG data, it’s imperative to create a feedback loop with each supplier. Implement easy and intuitive ways, including digital surveys and system integrations, for your suppliers to share the data that you care about.
Then, compile the data to see which suppliers are performing within your desired thresholds and which may need intervention. With this data in hand, you can provide clear direction to your suppliers about how they should contribute to better your collective ESG performance.
benchmark to make better supply chain and ESG decisions
There are a myriad of ways to improve performance on each of the dimensions of ESG throughout your supply chain. From selecting suppliers who use alternative fuel vehicles, pay living wages, prioritize sustainable packaging, or have a diverse workforce, there are many levers for supply chain professionals to pull. But how can they best evaluate supplier performance and identify which levers to pull?
Benchmarking. In addition to monitoring the thresholds mentioned above, once you’ve collected relevant supplier data you can prioritize side-by-side comparisons of similar suppliers to understand which companies are performing best on ESG metrics.
Take comparisons even further by using an ESG data aggregator and rating company like CSRHub to identify how well your suppliers stack up to their peers by industry or geography.
Finally, you can use scenario analysis tools to model how changing or removing a supplier will impact overall performance. These insights will help you optimize your supplier selection, negotiate agreements, and avoid riskier relationships that increase organizational ESG exposure.
Need help managing ESG performance across your supply chain? The AMCS Sustainability Platform helps you centralize supplier data, identify potential hotspots, and communicate with suppliers to effectively manage ESG impacts and risks.